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BUDGETED FOR WAGE INFLATION IN 2016? IF NOT, MAYBE YOU SHOULD!   Wage inflation has been relatively subdued for a number of years,  however 2015 saw this start to change and in 2016 we anticipate that wages are going to accelerate quite dramatically. Why you may ask? Well let’s look at the factors that contribute.  

  1. Employee Confidence. The US economy, in most sectors, has shed the negative sentiment and has been buoyed by economic figures that provide confidence. GDP growth is consistent and reasonable, monthly job creation is strong and unemployment has dropped to near 5%. Skilled workers are no longer reading horror stories of unemployment and mortgage defaults etc. Instead many are seeing long lists of unfilled jobs in their field. This feeling of security provides the confidence to demand a salary increase inside your organization or explore opportunities outside.

 

  1. Low Unemployment. 5% in the United States represents near full employment. Historically below this rate sees an increase in inflationary pressures. The reality is however that in some sectors we are seeing almost zero unemployment aligned with very significant new job growth. Examples are Engineering, IT, Tax and CPA accountancy. There are simply not enough qualified people in these fields and others. The labor markets are very pure. If demand exceeds supply, prices (salaries) go up. Your worker is being approached about these positions, possibly by multiple firms, and bidding wars and counter offers will push up salaries.

 

  1. Real Inflation. Why is your employee going to listen to these approaches? Or look elsewhere? Anyone living in a major city in the US has seen cost of living increases in 2015. Rental costs, food and other core expenses have seen significant raises. For the last year however this has not impacted the overall CPI and therefore has not impacted spending power. Why? Oil!! The price of oil since Q4 2014 has collapsed from near $100 a barrel to under $40. As energy costs make up such a large part of typical household expenses, this has offset the other cost of living increases. However this is a one-off occurrence. Oil prices cannot drop $60 again in 2016 so the “wealth effect” of this cheaper heating oil, Gasoline etc. is about to end exposing real incomes to the underlying cost increases in regions like California and the Northeast. Once people start seeing their spending power eroded more rapidly they will start to do something about it. Your worker is going to feel the increased costs and look to increase compensation as a result.

 

  1. Market Transparency. When wage inflation occurs in today’s world this becomes common knowledge very quickly. With the online resources that exist today as well as the rapid communication channels in the modern recruitment industry you will not be able to hide your staff from the news of pastures potentially being more fertile elsewhere. Staying abreast of current compensation levels will be key to staff retention.

  So 2016 really for the first time since 2007 will see the stars align and see your employee confident of their position, having a skill set that is in increasing demand, who understands their worth and who has easily accessible paths to other opportunities. They are being driven to explore opportunities by a gradually dropping real income and, as a consequence, are going to push for higher compensation while your competitors needing to hire talent in a restricted market are going to pay more to find it. Simple!! Of course the employment market is like the housing market. Just because house prices have risen 15% doesn’t mean yours has. Skill sets are the same. Many will still bemoan the apparent state of the economy and suggest employment statistics are rigged and inaccurate. This may give a sense of security to some employers. But if your employees have the “in demand” skill sets then you need to have your wits about you and as we approach pay reviews and budget setting, it would be wise to keep this in mind. Staying ahead of this inflation internally will be far easier and less damaging to your business than hoping for the best and then chasing the market. Morgan Philips provides “market mapping services” to clients to give accurate and up to date compensation data, allowing a true assessment of internal compensation and hence the potential flight risk of staff. Individual projects give smaller and more focused ranges than those available online, which are often very vague and as such of little use. Do give us a call here to learn more about the service or to discuss the current trends in the market and hiring plans for 2016.   Morgan Philips Executive Search +16172738293 www.morganphilipsexecutivesearch.com

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